WORLD OF INDUSTRIES - MOTION, DRIVE & AUTOMATION 5/2017

What made China the

What made China the manufacturing power that it is today Author: Sushen Doshi, International correspondent for World-of-Industries NEWS AND MARKETS To keep focusing on China as a driver growth in terms of industry and manufacturing investors need to have a clarity of how the country’s huge economy came into being, the knowledge of China’s ascent and its sectorwise composition will lead us to the direction where China is going from here on. The Chinese economy has experienced astonishing growth in the last few decades that has catapulted the country to become the world’s second largest economy. In 1978, when China started the program of economic reforms, the country was ranked ninth in terms of nominal GDP with $ 200 billion; 40 years later it jumped up to second place with a nominal GDP of $ 11 trillion. Since the introduction of the economic reforms in 1978, China has become the world’s manufacturing hub, where the secondary sector comprising manufacturing industry and construction represented the largest share of GDP. However, in recent years, China’s modernization has propelled the services sector and it has became the largest category of GDP with a share of 46 %, while the manufacturing and industrial sector still accounts for a sizeable 45 % of the country’s total output. Meanwhile, the agriculture sector’s weight in GDP has shrunk dramatically since the country opened its shores to the world. Brief history of China’s industrial ascent Deng Xiaoping, China’s paramount leader in mid-1970s, pushed for bold reforms that reshaped the country’s economy. In December 1978, Deng Xiaoping announced the official launch of the modernizations in four core areas: agriculture, defense, industry and science & technology. These economic reforms increased the role of market mechanisms and reduced government control over the economy, opened up China to foreign industry and investment, and established special economic zones. In early 1990s, most of the state-owned companies, except some large monopolies, were privatized or liquidated, thus expanding the role of the private sector in the economy. During the same period, China also reduced trade barriers; introduced deregulation and new taxes; reformed and bailed out the banking system. In addition, China’s entry into the WTO in December 2001, provided a huge boost to the country’s trade prospects. In 2002, President Hu Jintao and Premier Wen Jiabao that came into power, tried to reduce the income inequality between the coastal cities and China’s countryside, as the country’s skyrocketing growth mostly benefited just one part of the population. The WORLDOFINDUSTRIES – MOTION, DRIVE & AUTOMATION 5/2017

government increased subsidies, scrapped agricultural taxes, slowed privatization of state assets and promoted social welfare. By the mid-2000s the economy experienced an unprecedented economic growth mainly due to booming exports, resilient private consumption, soaring manufacturing and massive investments coming in. However, the 2008 global financial crisis forced the Chinese authorities to change their policies. In November 2008, the Chinese government unveiled a $ 500 billion stimulus package in an attempt to shield the country from the worst effects of the financial crisis. With such a stimulus package, China was able to weather the crisis better than most other countries, with GDP growing above 9 % and low inflation. However, the policies implemented during the crisis to foster economic growth exacerbated the country’s macroeconomic imbalances. In order to tackle these imbalances, the administration of President Xi Jinping and Premier Li Keqiang, unveiled measures aimed at promoting a more balanced economic model at the expense of the once-sacred rapid economic growth. In the recent years, China’s dreams have endured some growing pains. Although still solid, economic growth has slowed. In 2016, the Chinese economy missed its 7 % growth target for the year, marking the first time in two decades that growth has come in below the target. Investment in manufacturing and infrastructure is also slowing as the nation shifts from an investment driven growth model to a one more focused on consumer demand. China’s trade structure and FTAs Over the last two decades, China’s current accounts and capital accounts have recorded surpluses every year. This situation of surpluses in both, the current and the capital account has skyrocketed China’s foreign exchange reserves to almost $ 4 trillion in 2014. The capital account has benefited from increased inflows of foreign direct investment (FDI), with record inflows of $ 118 billion in 2013, thereby making China the second largest recipient of foreign investment. In terms of trade, China has experienced uninterrupted trade surpluses since 1993. The total trade revenue has multiplied by nearly 100 to $ 4 trillion in only three decades. Over the years, China has engaged in several bilateral and multilateral trade agreements that have opened new markets for its products. A Free Trade Agreement (FTA) between China and the ASEAN nations came into effect in 2010, which created the world’s third largest free trade area in terms of nominal GDP. China also established, FTAs with countries such as, Australia, Chile, Costa Rica, Korea, Peru, and Singapore. Moreover, there are other FTAs under negotiation with the Gulf Cooperation Council, Japan, Norway and Sri Lanka. In January 2017, USA pulled out of the Trans-Pacific Partnership (TPP), a FTA between the United States, Japan, and 10 other Pacific Rim countries. Since then, China has attempted to re-organize its ‘Regional Comprehensive Economic Partnership’ (RCEP), a planned FTA between China, Japan, South Korea, India, Australia, and the ASE- AN countries. The RCEP is not meant to be as comprehensive as the TPP, in that it is merely about removing tariffs. The TPP, on the other hand, included new rules governing cross-border investment, protection of intellectual property, labor rights, and environmental standards. Whatever the format of RCEP winds up being, it will liberalize trade in Asia and in the process fuel growth in the region. Exports from China In 2016, China had more than $ 2 trillion of revenue coming in through its exports. The electrical machinery and equipment industry was the largest export sector with a revenue more than $ 550 billion. Machines including electronics and computers were responsible for more than 16 % of China’s total exports by value ($ 340 billion). The furniture and textiles industry brought in around $ 90 billion and $ 150 billion respectively, in export revenues for China in 2016. The optical and medical apparatus industry generated around $ 68 billion, whereas plastics and automobile industry generated $ 65 and $ 60 billion respectively. From a continental perspective, 49 % of Chinese exports by value were delivered to other Asian countries while around 20 % to North America, 19 % to Europe. Although exports to Africa and South America expanded rapidly, they only account for 10 % of total exports. Due to China’s increased manufacturing capabilities, low cost labor and other cost competitive advantages, the country has experienced an astonishing growth of more than 25 % annually in real goods and services exports during the 2002 to 2008 period. Imports to China In order to supply for its factories and support China’s rapid industrial development, the country’s imports are mostly dominated by intermediate goods and a wide range of commodities, including oil, iron ore and copper. China’s soaring demand for raw materials pushed global commodity prices up until 2014, thereby boosting the coffers of many developing nations and commodity-exporting economies. However, since the end of the commodities super cycle at the end of 2014, global commodities prices have fallen partially due to a decrease in demand from China. Supply of imports into China is mostly dominated by Asian countries, with a combined share of around 30 % of total imports. Purchases from Europe and the U.S. account for 12 % and 8 % respectively. Imports from Africa, Australia, the Middle East and South America have increased strongly to represent a combined share of around 50 %. Parallel to exports, the growth in imports of real goods and services recorded an annual average expansion of around 24 % from 2002-08. However in 2009, imports experienced a contraction due to the global crisis, but recovered quickly and posted an increase of around 7 % in 2012-13. As the construction boom fades in China, the demand for natural resources also declined. This pulled down the global prices for base metals, energy products, as well as other resources. In 2015, Imports contracted sharply by 14 % as the Chinese economy adjusted to its new growth dynamics. China’s competitiveness Currently the hourly wages in China’s manufacturing sector are now higher than those in every Latin American country other than Chile and are nearing the levels found in some of Eurozone’s lower-income countries such as Greece. This is a huge change from just a decade ago, when China’s wages were among the lowest in the world. It means that living standards in China have risen substantially. It also means that China is losing its competitive advantage of low labor costs. According to some leading analysts, the productivity of Chinese manufacturing workers has actually increased faster than their wages, thereby helping China stay competitive. Looking forward, China’s aging population and declining working-age population means that wages are likely to keep on rising. This will cause a further shift in the composition of Chinese manufacturing, away from low-value-added processes towards high-tech and high value-added processes. Photograph: fotolia z WORLDOFINDUSTRIES – MOTION, DRIVE & AUTOMATION 5/2017